A quick look at online advertising through the lens of America

Slate wonders if online ad companies are worth what companies like Google and Microsoft are paying for them:

Last month, big establishment online company Google bought online-ad firm DoubleClick for $3.1 billion in cash. Last week, big establishment advertising agency WPP bought online-ad firm 24/7 Real Media for $649 million in cash. The next day, big establishment tech company Microsoft bought online-ad firm aQuantive for $6 billion in cash.

…this may be less a case of the market being irrationally ahead of the industry’s economic reality and more a case of the market being behind rational expectations for the industry.

Television, magazines, and newspapers may be hanging on because they are more powerful media for reaching the consumers companies most want to reach. But I suspect they’re hanging on for another demographic reason. Advertising is supposed to be a with-it, hot, trendy, tomorrow-based industry. But at root, the business of advertising is one of allocating capital, not cooking up clever jingles. And the people who make the decisions about how to allocate that $300-odd billion in capital each year—CEOs of consumer products companies, Fortune 500 executive vice presidents, media buyers, brand managers, agency heads—well, they’re old. It takes time to climb the corporate ladders to get to the rungs where really important decisions are made. Of course, these people, most of whom came of age as consumers in the 1960s, 1970s, and 1980s, use the Internet, spend a lot of time on it, and buy stuff on it. But they don’t understand it intuitively the way the younger crowd does. Do you think the CEOs of Ford, Citigroup, or Procter & Gamble are uploading photos to their MySpace pages, downloading music, and blogging?

…the question for people who invest in the stocks of online-advertising companies—as Google, WPP, and Microsoft have just done—isn’t just whether online ads are the way to reach consumers today. No, the question is whether online ads will be among the best ways to reach consumers in five and 10 years, when today’s twentysomethings will be buying cars and houses and kitchen appliances and pharmaceuticals. More important, in 2012 it’s possible to imagine that the brand managers and executives responsible for making advertising-spending decisions will be people who grew up with the medium, who didn’t need a consultant to tell them how it works. It’s a reasonable expectation that online advertising will continue to gain market share and that more and more capital will slosh into this sector. The big companies paying top dollar for online ad firms have just bought some expensive buckets.

The points of this article, plus or minus a few details, could be easily made about Japan, with the exception that Japan’s traditional media are much more nervous about aggressively engaging the Internet. I’ll go through them as we proceed to give you what you need, but for now suffice to say that Japan is awash in new technology, the young folks are growing up as avid users, but the managers at the advertisers and the agencies are too old to really get it. But as in the US, the future growth in Internet ads is understood, and traditional companies like Dentsu are realizing that they need to follow where people’s eyes are.